testified on tuesday. they were responding to a report of a subcommittee this is an hour and a half. , theank you.timothy cook ceo of apple, chief financial officer of apple and apple's head of tax operation. we thank you for being with us this morning. we look forward to your testimony, pursuant to rule six. at this time ask you to stand and raise your right hand. he is where that the testimony you are about to give will be the truth, the whole truth, and nothing but the truth, so help you god. >> i do.

we will use our traditional timing system today, about one minute before the red light comes on, you'll see them change from green to yellow, giving you an opportunity to conclude remarks. written testimony will be printed in the record in its entirety. we ask you to limit oral testimony to norma than 10 minutes. our thanks to you, mr. cook and your colleagues. -- it is a 15d minute opportunity instead of 10 minutes. >> i appreciate that. members of the subcommittee. i am proud to represent apple before you today. apple has enjoyed unprecedented success over the past 10 years. the worldwide popularity of our products has sort at our in the national revenues are twice as large as domestic revenues.

, i am often asked if apple still considers itself an american company. ananswer has always been emphatic yes. we are proud to be an american company and equally proud of our contributions to the u.s. economy. a bit larger today than the company created by dave jobs in his parent's garage 30 years ago. but that same spirit drives everything we do. of appleell the story 's success in just one word. innovation. .t is what we are known for products like iphone, ipad, which create an entirely new market. give customers something so incredibly useful, they cannot imagine their lives without them. you might be surprised to learn that much of that innovation takes place in a single u.s. zip

code. 95014. that is cupertino, california, where we have built an amazing team. the brightest, most creative people on the planet. come to work each day with just one mission, to make the very west products on earth. to dream up things that capture the world's imagination. inventions is the app store. if you have ever used an iphone or an ipod, you know that mobile apps are one of the hottest things in technology today. software development is one of the fastest growing job segments in the u.s. today. we estimate that the app store has generated nearly 300,000 new jobs in the u.s. developers have earned over $9 billion from apps sold on the cap store, half in the last year

alone. none of that economic activity was there five years ago. apple took a bold step in developing the app store and the app economy was born. is a multibillion- dollar market place place and it shows no sign of slowing. we have chosen to keep the design and development of those revolutionary products right here in the united states. while job growth stagnated across the country over the last decade, apple's u.s. for kforce drew -- workforce grew by five fold. we have employees in all 50 states. we have created hundreds of thousands of jobs at small and large businesses that support us, from people involved in manufacturing, two people involved in delivering the products to customers. components for ipod and ipod are

made in texas. iphone glass comes from kentucky. in total, apple is responsible for creating or supporting 600,000 new jobs. our earnings growth to invest billions of dollars in the u.s. to create even more american jobs. toare investing $100 million later this year. it will be assembled in texas, include components from illinois and florida and rely on equipment produced in kentucky and michigan. we have constructed one of the world's largest data centers in north carolina, reflecting our commitment to the environment, they are powered by the largest solar farm in -- and fuel-cell of its kind in the u.s. we are building data centers in oregon and nevada. a new campus in texas. a new had orders in cupertino.

growth andis investment, to the best of our knowledge, apple has become the largest corporate income tax payer in america. cashyear, our u.s. federal effective tax rate was 30.5% and we paid nearly $6 billion in cash to the u.s. treasury. that is more than $60 million each day. we expect to pay even more this year. i would like to explain to the subcommittee very clearly how we view our responsibility with respect to taxes. apple has real operations in real places with apple employees selling real products to real customers. ,e pay all the taxes we owe

every single dollar. we not only comply with the law, but we comply with the spirit of the laws. we don't depend on tax gimmicks. we don't move intellectual property offshore and use it to sell our products back to the united states to avoid taxes. we don't -- money on some caribbean island. to fund move our money avoid theusiness and repatriation tax. our four subsidiaries hold 70% of our cash because of the rapid growth of our international business. we use these earnings to fund our foreign operations, spending billions of dollars to acquire equipment to make up products and finance construction of apple retail stores around the world. under the current u.s. corporate veryystem, it would be expensive to bring the cash back to the united states. unfortunately, the tax code has

not kept up with the digital age. the tax system handicaps american corporations in relation to our foreign competitors who don't have such constraints on the free movement of capital. is a company of strong values. we believe our extraordinary brings increased responsibilities to communities where we live, work, and sell our product. thenthusiastically embrace believe, as president kennedy said, to whom much is given, much is required. in addition to creating hundreds of thousands of american jobs and developing products that deeply enrich the lives of apple is a champion of human rights, education, and the

environment. our belief that innovation should serve humanity's deepest values and highest aspirations is not going to change. apple is also a company of strong opinions. we have never had a large presence in this town, we are deeply committed to our country 's welfare. we believe that great public alicy can be a catalyst for better society and stronger america. apple has always believed in the simple. not the complex. you can see this in our products and the way we conduct ourselves. it is in this spirit that we recommend a dramatic simplification of the corporate tax code. this reform should be revenue neutral, eliminate all corporate tax expenditures, lower

corporate income tax rates, and implement a reasonable tax on foreign earnings that allows the free flow of capital back to the united states. we make this recommendation with our eyes wide open, fully recognizing that this would likely result in an increase in apple's u.s. taxes. we strongly believe that such comprehensive reform would be fair to all taxpayers, would keep america globally competitive and would promote u.s. economic growth. my colleague, peter oppenheimer, will now make if you opening remarks and then we will be happy to answer your questions. thank you very much. >> thank you. mr. oppenheimer. .> good morning my name is peter oppenheimer, and i am apple's chief financial officer. i would like to discuss the structure and management of

apple's global business and financial operations. in the u.s., our operation structure is simple. customers our through our retail stores, online stores, and channel partners. we provide our award-winning support to our customers through the genius bar and applecare. ,e pay taxes to federal, state and local governments of the full profits from the sales. we seek to u.s., provide the same industry- leading product, services, and support that our u.s. customers have come to expect. we now sell the iphone and ipad in over 100 countries. like all multinational companies, apple must follow the local laws and regulations in each region we operate. this often requires apple to establish its presence, not only in the region but in the particular country where we wish to sell our products and services. presence in these countries often takes the form of apple on subsidiaries.

these in country subsidiaries acquire products in their , which acquire products from a contract manufacturer. , oure european region primary operating subsidiaries are incorporated in ireland. these, which were established in the early 1980's, now employing nearly 4000 people in ireland. broke ground on an expansion to our campus in court. since 1980, we have had a cautionary agreement with our irish subsidiaries. it was first put in place when apple was about five years old and wanted to sell its computers overseas. at that time, apple's revenues were 1/10 of one percent of what they were today. the invention of the iphone was decades away. the substance of the agreement is largely unchanged today, except for expansion into more

countries and recent update comply new u.s. treasury regulations. our cautionary agreement, common in the industry, is audited by the irs and we are in full compliance with all laws and regulations. the agreement enables apple to share the cost and risk of developing new products with our irish subsidiaries. all of this r&d and the jobs that go with it take place in the u.s.. for funding, the irish subsidiaries have rights to distribute in europe and asia, products created by the r&d funded by the agreement. we have used this method to distribute products internationally for more than 30 years. more than half of our ongoing r&d cost are funded by apple ireland. when times are good, as they happen in recent years, our irish subsidiaries benefit rightly, as we do in the u.s.. when they lost money in the mid- 1990's, our irish subsidiaries lost money as well.

losing money then, because it serves as a reminder apple came to going out of business. the brink of bankruptcy and about out of cash. in two years, we lost $2 billion. i can tell you firsthand, we are facing the real possibility of a world without apple. the turnaround was a companywide effort to streamline and sympathize with that apple could survive. operations and finances to make everything as simple and efficient as possible. , weart of that effort consolidated our european post- tax income into two existing subsidiaries. a holding company, apple operations international, and an operating company, apple sales international. the consolidation illuminated in norman's complexity and handling foreign bank accounts and improved the ability to

manage currency risk. while these are both irishorated in ireland, law contemplates that companies may be incorporated in ireland without being tax resident there. i should clarify one point. for many years, asi had thousands of employees in ireland. until 2012, the payroll for these employees was run through another apple subsidiary, aoe. two are nott these tax resident in ireland does not reduce our u.s. taxes at all. afi profits held by aoi and have been taxed by local governments for the money is earned. the investment income on their cash holdings is taxed by the u.s. government at the corporate tax rate of 35%. apple could certainly choose to manage foreign profits in

numerous foreign subsidiaries without moving the cash, but that would have absolutely no effect on the taxes we pay in the u.s.. eliminated the central cash management function would be inefficient. managing larger pools of cash centrally, rather than many places around the world, reduces complexity, better protect the assets and helps us earn high returns. in theapple is fortunate position of having more cash from international operations then we need to run our company and pursue strategic opportunities. some observers question apple's decision to fund part of its capital return to shareholders by issuing $70 billion in debt rather than repatriating foreign earnings. apple respectfully suggests that any analysis will conclude that this decision was in the best interest of our shareholders. if apple had used for in

earnings to return capital, the funds would have been diminished by the faerie high -- a very high u.s. corporate tax rate, 35%. even today's historically low interest rates, the cost of issuing debt was less than three percent. answerd be happy to your questions. thank you. >> thank you. likes good morning. -- >> good morning. our statement is concluded, senator. >> plenty thank you for your cooperation. we appreciate that. , you made reference -- you quoted president kennedy. i am wondering if you agree with the following statement that he made in his april 1961 tax message. serves as a shelter for tax to escape

through the unjustifiable full use of tax havens such as switzerland. recently, more and more enterprises organized abroad by american firms that arranged their corporate structures, aided by artificial arrangements subsidiary,nt regarding intercompany pricing, the transfer of patent licensing rights, the shifting of management fees and similar practices, which maximize the accumulation of profits and the tax haven. do you agree with that? >> he and his brother have been long-term heroes of mine. i am sure if he said it, at the time, it was true. from our point of view, i don't consider referral to the -- deferral to be a or abusive in any way. inc,es apple think -- aoi, asi, aoe?

>> yes. >> all those companies in ireland are owned by apple. is that correct? >> they are all legally owned by apple, inc. aoi punctually managed and controlled? our view, it is functionally managed and controlled, which is an irish legal concept, in the united states. february 11 letter to the subcommittee, apple wrote us made a is -- has "not no aoision they stun management and control." why did you tell us that? >> the reason we responded in a manner is that under irish law,

the requirement for evaluating and concluding on the tax residency of ireland looks to whether or not central management takes place in management -- in ireland are not. it does not formally required that you make a determination that it takes place somewhere else. >> what you told us this morning that you believe that the aoi is in the united states. apple has concluded that. >> yes. i believe that in a tree this meeting with your staff, they asked the same question. i believe there provided the same response. >> mr. cook, do you agree that the location of aoi central management control is in united states? the legalknow what definition is. from a point of view, yes. -- practical point of view, yes.

is thatve to asi, functionally managed and controlled in the united states? >> as a practical matter, applying the irish legal standard of central management and control, i believe that it is centrally managed and controlled from the united states. >> does apple agree that it is functionally managed and controlled in united states? >> under irish law -- >> under our law, do you believe that? >> i don't believe that central management and control is a legal term under u.s. law. >> do you believe it is functionally managed and controlled in the 90s eight? >> yes. >> mr. cook? >> we have significant .mployees in ireland there is a significant amount of decision and leadership and

negotiations back on in ireland. some of the most strategic ones ones do take place in the united states. >> which you agree that asi is managed and controlled in the united states? >> from a practical matter, i don't have a legal definition. >> as a practical matter, you agree it is functionally managed and controlled in the night is a? >> yes, senator. >> thank you. aoi things incorporated in ireland, correct? >> yes, it is incorporated in ireland. >> where is aoi a tax resident? >> it does not have a tax residency. that does not mean that it does not pay taxes, the interest that

it earned is paid -- u.s. taxes are paid in full on its interest. >> the interest you are talking about is on the tens of billions has an cash? >> correct. the cash that was distributed from the operating subsidiaries underneath. >> those tens of billions of dollars of cash earn interest and that interest is paid by apple incorporated? >> the u.s. taxes paid by apple inc at the u.s. rate of 35%, yes. >> there is no tax paid on the money itself that has been sent to apple -- excuse me, to aoi -- by theributors, distributors is that correct? not paid in ireland or the united states.

>> the income of the subsidiaries have been subject to tax in the countries in which they operate. paid in ireland on those distributions by the is no dates? >> there u.s. tax on the transfer of the balances to aoi. the income earned by asi and subject to irish tax in full, in accordance with the agreement we have with ireland. >> is that a maximum of 2%? >> mr. chairman, i am not precisely sure of the mechanics of the competition. >> is that a maximum of two percent? >> approximately, yes. >> has aoi filed the corporate income tax return? -- in the last five years? >> no. prior to that, it made filings in france for a branch operation

there. >> they paid no corporate income tax for the last five years at least, is that correct? >> again, they did not pay any corporate income tax, but apple inc it corporate -- >> i did not ask about them, i asked about aoi. that is where most of the profits go? >> they receive dividends from the operating subsidiaries underneath them. >> what is the amount of cash that went to asi from those dividends? >> over what. of time you have to -- over what period of time? >> last five years. >> approximately 30 billion. >> asi or aoi? number of other operating subsidiaries. aoi is a holding company. own a his roles as to number of's international

subsidiaries. >> asi receives about $70 billion in cash from those subsidiaries in about 30 billion of that went to aoi, is that right? >> i don't have the precise details. there were distributions from a number of other proof -- subsidiaries. approximately. to summarize. aoi has received about $30 billion over the last five years, but has not filed a corporate income tax return. is that correct cap go >> that is correct. that income is not subject to u.s. tax under both statute and by regulation. while it has not filed a tax pays, apple inc.

interest on the interest earned at aoi. >> i am not interested in the interest -- i'm talking about the $30 billion it received in .ividends it has not filed a corporate income tax return on the money, is that correct? >> that is correct. all of the subsidiaries underneath have earned that money in their countries and pay taxes required by law. >> ok. does asi on the economic rights to apple's intellectual property offshore other than in the americas? >> yes it does, in part. it owns that in combination with the subsidiary that handles some of the manufacturing that the company

continues to do in ireland. >> neither one of those companies files an income tax in the united states, is that correct? >> neither of those companies file a tax return and the united states, although apple inc. reports -- >> we just went through that committee interest interest. >> actually both interest and a small amount of what is known as foreign-based company sales income that is subject to current u.s. tax from asi's business activity. >> my time is up. senator mccain? >> thank you. i thank the witnesses and mr. on alle congratulate you of your successes. .nd that of apple as we said earlier, you have managed to change the world, which is an incredible legacy for apple and all of the men and women who serve it. also, i think you have to be a

pretty smart guy to do what you do and pretty tough guy. you have that reputation. i say that in a consummate three fashion. i enjoyed our conversation. feel you haveou been bullied or harassed by this committee or its members? >> i feel very good to be participating in this. . hope to help the process i would like for comprehensive tax reform to be passed this year, and anyway that apple can help do that, we are ready to help. >> it was my understanding that you sought to testify before this committee for that purpose. is that correct? >> it is important that we tell our story. to hearlike people directly from me. >> you are not dragged before before this committee? >> i did not get dragged here.

>> you don't drive very easily, i understand. [laughter] i thank you. this is an issue of concern for congress. is, you question to you have obviously taken advantage of a number of aspects of the tax code, foreign and the message. that has reduced the tax burden. i think we would agree that if you were paying the 35% corporate tax rate that domestic companies pay. one draw the conclusion that you and apple overan unfair advantage domestic-based corporations and companies? in other words, smaller companies in this country that don't have the same ability that you do to locate in ireland or other countries overseas? >> that is not the way that i see it. i would like to describe that.

the way that i look at this is, of its profits% in taxes, in the united states. i don't know exactly where this stacks up relative to other companies, but i would guess it is extremely high in the list. i know with the $6 billion, we united top pair in the ne states. we do have a low tax rate outside the united states. but this tax rate is for products that we sell outside the united states, not within. the way i look at this, there is no shifting going on. in addition, if you look at apple versus other companies that do not sell in the u.s., i would say the applicable comparison would be the 30.5% effective rate. not our foreign tax rate.

>> a little simpler. why does aoi exist echople? why was aoi incorporated in ireland? 4000 employees is impressive, but not when you look at your overall workforce. maybe you can clear that up. >> thank you very much for question. aoi was created in 1980. in this time, apple was -- before the days of the iphone and ipad an ipod and things were even invented. the mac did not matter until 1984. apple was looking for a place to distribute its products in europe. >> i understand that. is that still operative today? >> the relationship between apple and the irish government is still there.

we built up a sizable population -- >> given the tax rate that you are paying in ireland, i am sure you have a very close relationship. >> it is more than that, sir. we built up a significant scale waste their of people that really understand the european market. they serve our customers well and provide a number of functions for that. also, i think it is important to understand that aoi is nothing more than a holding company. a holding company is a concept that many companies use. it is not an operating company. the dividend that go into this operating cash holding company have already been taxed in their local jurisdiction. aoi is nothing more -- >> to great advantage to apple, wouldn't you agree? >> aoi is nothing more than a company that has been setup to

to provide an efficient way to manage apples cash. from income that has already been taxed. the investment income that comes out of aoi is taxed in the united states of the full 35% rate. from my point of view, it does not reduce our u.s. taxes at all. >> can you please state for the record, where aoi, asi and aoe is an tax residence. >> my understanding is there is not a tax residence for either of these three subsidiaries you just named. logical?hat sound asigain, as i look at it, and aod are paying irish taxes. i do not understand the difference between a tax presence and tax residence.

i know that they fill out irish taxes and pay those. aoi is just a holding company, the interests -- it only makes investment income. all of that investment income is taxed in the united states at the full 35% level. relief you look at that of 35% tax burden, which i am sure we are in agreement is way too high, now the highest in the world, i understand, but you said the purpose of aoi is to ease administrative burdens. either certain u.s. tax burdens -- isn't it obvious that you are not bearing the same tax burden if you are daring and the united states, which then gives you some advantage over corporations and companies which are smaller and strictly located in the unit dates of america?

i think you would agree that gives you a significant advantage. >> i have tremendous respect for you, sir. i said this differently than you do. what i see is, apple is earning his profits outside the united states, by law and regulation, they are not taxable in the u.s.. we set up a holding company to collect these after-tax profits from our different foreign , theniaries into aoi invest as any treasury arm would, in the interest investment -- profits off of that are paid in the u.s. as they are required to under existing u.s. treasury regulation. >> can you understand the perception of unfair advantage here? >> i see this as a very complex am glad we are having the discussion. don't see it as being unfair. i am not an unfair person.

that is not who we are as a company or who i am as an individual. , would not preside over that honestly. i don't see it in that way. >> i thank you, i am out of time. but it really want to ask is why the hell i have to keep updating the apps on my iphone all the time and why you don't fix that. >> we are trying to make them better all the time. >> thank you. we have only five minutes left on roll call. we had better recess for about 10 minutes. thank you.

>> we will come back to session. senator mccaskill. >> i certainly understand that what you all have engaged in is what every good american business does, taxed mining. -- taxdon't taxed land planning. plan then youax are incompetent as an american business. believe i can understand better why the structure you have used this been embraced so it will inform our decisions in how to make it simpler into how we can support international growth for all of our companies that are american companies. andborrowed $70 billion

issued bonds to pay dividends to your shareholders fairly recently. it was in the economic news because of your large cash reserves. you clearly made a decision that it was going to be cheaper for , then service that debt use the cash to pay dividends and to bring any of this cash back. do you have the analysis that would help us understand how much cheaper it was for you to borrow that money? >> i can describe it at a broad level. is atst of capital today an all-time low, as you know. forweighted average cost the borrowing that we just did was less than two percent. we were faced with the decision or pay 35% tote repatriate.

as we looked at that analysis, we felt strongly that it was in the best interest of our securelders for us to the debt. >> ok. let's assume that we simplify this. ireland gave you a two percent rate that was negotiated for your company. correct? >> we went there in 1980. they were very much recruiting technology companies at that time. $100 is -- was a small million business that had no operations in europe. as a part of recruiting us, the irish government did give us a tax incentive agreement to enter their. ance then, we have built up sizable operation there, nearly 4000 people, we're building a a new site, continuing to grow. people there our are very fundamental for understanding the european market and servicing our customers thfr